Maryland adopts emergency economic nexus regulation

In the wake of the U.S. Supreme Court’s Wayfair decision, a number of states have begun imposing economic nexus standards for sales and use tax purposes. Maryland just became the latest. On August 29, 2018, the Maryland General Assembly’s Joint Committee on Administrative, Executive, and Legislative Review (AELR) approved the Comptroller of Maryland’s “emergency regulation” requiring vendors with more than $100,000 in sales or 200 or more separate transactions into Maryland to register and collect sales tax beginning on October 1, 2018. The emergency regulation will expire on March 30, 2019, at which point it must go through the normal rulemaking process, which will include a period for public comment.

Under Maryland law, to “engage in the business of an out-of-state vendor” means to sell or deliver tangible personal property or taxable services for use in Maryland. Pursuant to the statute, this includes maintaining an office or warehouse in the state, having an agent or salesman delivering or soliciting orders in the state, and entering the state on a regular basis to provide services or repairs to tangible personal property. The statute does not expressly impose an economic nexus threshold. And the regulation currently in effect mimics the definitions in the statute. In other words, engaging in the business of an out-of-state vendor under existing law arguably is limited to sellers with some physical presence in Maryland.

Comptroller Peter Franchot has been a staunch proponent of economic nexus and believes that the physical presence rule harms local Maryland businesses. In a recent interview with Reed Smith, Franchot predicted a victory for the states in Wayfair and said he “is totally in favor of a Maryland sales tax on remote sellers,” and that “Wayfair and all these other people need to do the right thing” and collect and remit sales tax.

Emboldened by the Supreme Court’s rejection of a physical presence nexus standard, the Comptroller took advantage of a Maryland law authorizing him to adopt reasonable regulations to administer Maryland’s sales tax laws on an emergency basis so long as the rules are consistent with the letter and policy of existing statute and approved by the General Assembly. On August 2, 2018, the Comptroller petitioned the AELR to allow imposition of an economic nexus standard on an emergency basis, arguing that a delayed response would have a negative impact on Maryland’s sales and use tax receipts. The AELR approved the emergency regulation on August 29, 2018.

Thus, beginning October 1, 2018, remote-seller vendors with more than $100,000 in sales or at least 200 separate transactions into Maryland must register and collect the sales tax.

Reed Smith observation

Although the Comptroller’s Office interprets Maryland’s sales tax nexus statute “as broadly as is permitted under the United States Constitution,” that interpretation – and thus the emergency regulation – may be inconsistent with Maryland’s existing nexus statute that arguably requires physical presence. In 2017, legislators proposed two economic nexus bills that did not pass. Those bills would have altered the definition of “engage in the business of an out-of-state vendor,” for purposes of establishing nexus under the sales and use tax law, to include vendors with more than $10,000 in sales or 200 or more separate transactions in Maryland. Thus, at least some members of the General Assembly who wished to impose economic nexus believed that legislation was necessary to do so, and the failure of those bills suggests that the General Assembly at large did not have the appetite to impose economic nexus, at least not before the Supreme Court chimed in and not at such a low threshold.

The General Assembly may take this up again in 2019, making it easier for the Comptroller to promulgate a permanent regulation. Reed Smith will be following the rulemaking process and will submit comments anonymously on behalf of vendors.